Wednesday, June 29, 2005

Your very own Social Security lockbox

Commentary by David Reinhard


David Reinhard

President Bush wants to fix Social Security's looming problems with personal savings accounts. Democrats counter with -- well, with nothing. They oppose his personal accounts but refuse to say what they're for. Bush seems to have convinced the public that Social Security needs fixing and sooner rather than later, but congressional Democrats and their allies have made the politics of Social Security reform so tough that Bush can't even count on Republicans to pass his personal savings account proposal.

How to break the stalemate?

Last week some Capitol Hill Republicans -- senators such as South Carolina's Jim DeMint, Pennsylvania's Rick Santorum and Idaho's Mike Crapo, representatives such as Florida's Clay Shaw and Wisconsin's Paul Ryan -- tried. They would take surplus revenues Social Security is to receive until 2016 and put them in lockboxes. No, not the faux lockbox of yore. Not Al Gore's "l. . .o. . .c. . .k. . .b. . .o. . .x." Under their new proposals, Social Security surplus funds would be credited proportionally to the accounts of people paying Social Security taxes. The credit would take the form of a marketable Treasury bond. This risk-free personal retirement account would grow at the same annual rate of 1.8 percent return as the current Social Security system.

No, this is not the solution to the system's impending insolvency woes. It's, maybe, only part of the solution, or a steppingstone to part of a solution. But the DeMint-Shaw approach has its charms. Along with stirring up the Social Security debate along Pennsylvania Avenue -- at least, among Republicans or anyone who feels compelled to offer fixes to Social Security -- their "your own private lockbox" proposal has substantive merit.

You know that Social Security surplus? Congress has already spent it, and will continue to do so. Congress now puts an IOU somewhere in West Virginia when it spends the money on other programs, but that's it. The only way Congress can make good on these IOUs and meet projected baby-boom retirement obligations is to raise taxes and/or slash other spending. There's no pile of Social Security cash with your name on it, safe and secure, after years of paying Social Security taxes. As Bush explained earlier this month, "You pay your payroll tax, we pay out to current retirees, and then we spend your money on other government programs."

Bush would allow Americans to invest part of their Social Security taxes in certain stock and bond funds. His voluntary retirement accounts have a lot going for them -- the power of safe, long-term, diversified investment returns. They won't solve all of Social Security's problems. He doesn't say they will. But they should be part of any fix.

Still, there's a big gap between "should be" and "is" in politics. The DeMint-Shaw way helps bridge that gap. It takes the alleged risk out of Bush's personal retirement accounts. Their new accounts would be in U.S. treasury bonds -- go ahead, call these a risky scheme -- and addresses an overarching, bipartisan gripe about the current system: Congress is spending the Social Security surplus.

"Let's get rid of Congress' secret slush fund," DeMint said last week. "It's time to restore honesty and integrity to this process."

True, using the Social Security surplus to pre-fund retirements under Social Security -- what a concept -- would boost the federal deficit or require Congress to cut other spending. Neither would be so bad. The approach would increase the federal deficit only to the extent that the current Social Security surplus masks the true deficit. This year, that would be a difference of $170 billion in a $2.5 trillion budget and a $12-trillion economy.

Individuals, not Congress, would keep the Social Security surplus safe and secure. Thus, the DeMint-Shaw approach would create tens of millions of lockboxes. Congress couldn't spend the surplus today, and individuals could pass the accounts on to their heirs in the future.

There is, of course, a danger here: People with these Social Security accounts may start asking why they're earning only 1.8 percent interest when their 401(k)s are earning more. Or why these accounts can't be bigger.

Thus, you can see why Democrats greeted DeMint-Shaw with another round of alternative-less "no's." And why Republicans who want to break the gridlock may take this first step.

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